The Fed Slowed Their Roll, But Not Enough for Investors’ Liking

The Federal Open Market Committee (FOMC), a branch of the Federal Reserve System, is a group consisting of twelve voting members responsible for monetary policy in the United States. The group holds eight regularly scheduled (closed-door) meetings per year to review financial conditions and set policies to achieve their dual mandate of price stability and sustained economic growth through maximum employment. Committee members are characterized as either “hawks” (favoring tight monetary policy), “doves” (favoring more accommodative policies) or centrists (somewhere in between). Members of the Committee, including the Chair and Vice Chair, are nominated by the President of the United States and confirmed by the Senate but operate independently with final say on interest rate policy.

The FOMC utilizes a limited number of tools including changing the target level of a key short-term interest rate known as the Fed Funds Rate (overnight borrowing rate that banks use to lend their balances at the Federal Reserve to each other) and open market operations, consisting of buying or selling securities in the open market utilizing the Fed’s very sizable balance sheet (currently $8.4 trillion).  The broader Board of Governors of the Federal Reserve System also controls other monetary policy tools including the Discount Rate (interest rate charged to financial institutions on fully secured loans they receive from regional Federal Reserve Bank’s lending facilities), and reserve requirements (amount of capital commercial banks must keep on hand relative to deposits and lending operations).  These combined limited number of policy levers have a broad effect on numerous aspects of the financial system including the cost of credit to borrowers, money supply, shape of the yield curve, foreign exchange rates and the price of goods and services.